Obama administration closes off two avenues for new Arctic drilling

WASHINGTON — The Obama administration moved on several fronts Friday to block new oil drilling in the Arctic Ocean, weeks after Shell said it would be walking away from the area “for the foreseeable future.”

The Interior Department announced it was canceling government auctions of drilling rights in the Chukchi and Beaufort seas, previously scheduled for 2016 and 2017 respectively. At the same time, it formally rejected bids by Statoil and Shell for more time to search for crude under their existing Arctic leases.

The decisions ensure a long chill on oil development in U.S. Arctic waters and deal another blow to Alaska, which heavily depends on energy revenue and is still reeling from Shell’s pullout. Environmentalists celebrated the move as a victory for Arctic waters and the animals that thrive in them.

“In light of Shell’s announcement, the amount of acreage already under lease and current market conditions, it does not make sense to prepare for lease sales in the Arctic in the next year and a half,” said Secretary of the Interior Sally Jewell.

Though the Obama administration’s moves were likely to be cheered by environmentalists who have passionately fought Arctic drilling, they were partly pragmatic and partly dictated by federal law.

There already was low industry interest in the planned Chukchi and Beaufort sea lease sales even before oil prices plummeted and Shell saw disappointing results at a critical exploratory well last month. When the Interior Department asked oil companies to highlight areas of interest for future Arctic sales, only one unidentified company spoke up, nominating part of the Beaufort Sea for possible bidding.

And Interior’s decision to deny lease suspension requests from Shell and Statoil mirrors a similar rejection of a ConocoPhillips’ request for more time on its own Arctic leases. Federal law does not give the Interior Department the authority to issue blanket extensions and instead requires companies lay out a specific plan for drilling and developing leased acreage in order to get more time.

Michael LeVine, Pacific senior counsel for the conservation group Oceana, said the administration was making “the right choices.”

“The government’s actions are consistent with the law, good public policy and economic realities,” he said. “Especially as Shell has stopped its Arctic Ocean exploration program, there is no good reason to extend existing leases or offer new ones. We hope that today’s announcement reflects a growing recognition that it is time to move on from unwise investments in Arctic Ocean leases and chart a new, sustainable course for the Arctic.”

Lois Epstein, a licensed engineer who directs The Wilderness Society’s Arctic program, said the Interior Department “made an entirely reasonable decision” following Shell’s decision to leave the region.

“Because of Shell’s failure to find significant oil in the Chukchi Sea, new Arctic Ocean lease sales — which require extensive government preparation and costs — would likely be unsuccessful.”

Lengthy environmental analysis must be conducted before each government lease sale, and with just one company showing interest in the auctions, they were unlikely to be competitive. That raised the prospect that the government would lose more money than it would make in the auctions and that if any blocks were sold, they could go for less than true market value.

The Interior Department has canceled offshore lease sales before; for instance, in 2011, it called off a planned auction of drilling rights in Alaska’s Cook Inlet, citing insufficient interest.

Erik Milito, upstream director for the American Petroleum Institute, said regulatory uncertainty scared companies off of the upcoming auctions.

“While it is not surprising that Interior canceled the remaining lease sales because there was an absence of nominations, it is the significant regulatory uncertainty that has created the reluctance on the part of our industry,” he said in a statement.

Seven companies hold drilling rights in the Chukchi Sea, but Shell is the only one to actively explore its holdings there, by drilling the initial part of a well in 2012 and boring another well this summer. When it yielded “disappointing” results — effectively condemning the company’s Burger prospect 70 miles off the Alaska coast — Shell said it would indefinitely halt exploration in the region.

Shell, Statoil and ConocoPhillips had asked Interior regulators to issue “suspensions” of their Arctic leases — effectively stopping the clock from ticking on their 10-year terms. Without extensions, Beaufort Sea leases expire in 2017 and Chukchi Sea leases are invalid in 2020.

When the Interior Department rejected an earlier suspension request from ConocoPhillips, the Houston company challenged the ruling before an Interior Department appeals board. Settlement talks are underway.

Shell and Statoil can now appeal their denials to the same administrative body. If they do, it could be a move to preserve the optional value of the leases, which effectively give the companies a chance to explore in U.S. Arctic waters for a few more years — and possibly wait for a new administration that could take a different view on the issue.

A Statoil spokesman said the company was still evaluating its next steps. “As a result of the uncertainty, regulatory environment and high costs associated with offshore operations in Alaska, Statoil does not currently have a timeline for future activities,” said spokesman Hakon Fonseca Nordang.

Shell reiterated Friday that more time is needed to explore the Arctic.

“When it comes to frontier exploration in Alaska, one size does not fit all,” said Shell spokesman Curtis Smith. “We continue to believe the 10-year primary lease term needs to be extended.”

Holding on to the territory is not without costs. Companies pay escalating annual rental payments for their offshore oil and gas leases. An analysis by the conservation group Oceana suggests ConocoPhillips would have to pay an estimated $9.6 million between now and May 1, 2020 to hold on to its 61 leases in the Chukchi Sea. For Shell, which has 275 Chukchi Sea leases, the tab would be about $43 million. And for Statoil, the cumulative bill is roughly $10.4 million. The estimates do not account for small variations tied to different effective dates for some leases.

Other leaseholders in the Chukchi Sea include Eni Petroleum, Iona Energy Company, OOGC America, and Repsol.

In its July 2014 request for five more years, Shell said “circumstances beyond its control” had prevented exploratory drilling on its leases and also cited regulatory restrictions that limit operations, the limited availability of Arctic-viable rigs and uncertainty about new federal requirements for operating in the region. Litigation over the 2008 government auction of Shell’s Chukchi Sea leases did block some of the company’s work, but regulators at the Bureau of Safety and Environmental Enforcement previously suspended leases to make up for the legal delays.

In bullet points laid out over a 9-page response, Mark Fesmire, director of the bureau’s Alaska region, said Shell’s allegations of unreasonable, unforeseen delays were unfounded.

“Shell acknowledges the complex nature of Arctic operations and conditions, and by the same token should reasonably have anticipated the rigorous regulatory environment necessitated by such circumstances,” Fesmire said. Further, he added, offshore operators know “full well” that they are constantly subject to new regulation “to ensure safe and responsible oil and gas development in ever-changing technological environments.”

Statoil began seeking lease suspensions in July 2014, citing “inordinate delays in obtaining required permits.” It also complained that an evolving regulatory landscape “beyond (its) control” made it impossible for the company to develop an exploration plan under existing federal mandates being targeted for an update.

But Fesmire countered in a memo to the company that Statoil has not actually applied for permits “to conduct operations on its Chukchi Sea leases, much less been inordinately delayed in obtaining them.”

“Statoil apparently chooses to ignore the fact that another holder of leases in the Chukchi Sea, Shell, was able to conduct operations this year under an exploration plan that was approved by the Bureau of Ocean Energy Management under the current regulations,” Fesmire added.

The head of the House Natural Resources Committee, Rep. Rob Bishop, R-Utah, blasted the Obama administration’s move.

“It drives Shell out of the Arctic by giving the company regulatory hell for years, then uses this victory for big special interest groups to stop any hope for future energy development in the Arctic,” Bishop said.

API’s Milito also said the dynamic regulatory backdrop entangled development in the region.

“Our industry’s strong interest in developing our country’s vast offshore oil and natural gas resources in Alaska was undermined years ago when the administration began implementing a system of regulatory and permitting unpredictability and uncertainty,” Milito said. “Investment decisions have been directly thwarted by the policy decisions of the administration related to Alaskan Outer Continental Shelf development, and lease extensions are clearly justified under the circumstances.”

The decisions deprive Alaska of more potential opportunities to launch a new generation of oil development in and around the state — ensuring crude to fill the Trans-Alaskan Pipeline System and a steady flow of revenues that fill state coffers.

“Alaska must be able to responsibly explore and develop our rich natural resources both onshore and offshore,” said Alaska Gov. Bill Walker. “Any action that limits our ability to explore for more oil — to increase much-needed oil production through the Trans-Alaska Oil Pipeline — creates unnecessary uncertainty and burden on our economy.”

Offshore drilling advocates have argued that the structure of coastal oil and gas leases — with initial terms capped at 10 years — are not well suited for the Arctic, where exploration is confined to about three ice-free months each year.

The National Petroleum Council, a federal advisory committee with heavy industry membership, advised the Energy Department in March that any significant offshore opportunity in the Arctic would take 10 to 30 years to develop.

Sen. Lisa Murkowski, R-Alaska, has advanced legislation that would empower the Interior secretary to extend the initial term of federal leases in the Chukchi and Beaufort seas to 20 years — effectively creating a longer-term alternative to the temporary suspensions of operation and production allowed in limited circumstances today.

But Shell’s decision to abandon the area puts a chill on that development. The company sunk $7 billion into its Arctic quest and effectively came up dry — a sum that other firms would be unlikely to tolerate as the time on their leases ticks down and amid a 16-month slump in oil prices.

The government is still mulling auctioning drilling rights in the Beaufort and Chukchi seas as early as 2020, as part of a plan for selling oil and gas leases on the U.S. outer continental shelf from mid 2017 to mid 2022.

And a sale of federal oil and gas leases in Alaska’s Cook Inlet — near ongoing activity in state waters — is still being planned for next year.